Reverse mortgages have gained popularity among older homeowners as a way to tap into their home equity without having to sell their property. This financial tool allows individuals aged 62 or older to borrow against the value of their home, with the loan amount typically increasing over time. However, it is crucial to understand what happens when a reverse mortgage runs out and the implications it can have on both the homeowner and their heirs.
Interesting Facts about Reverse Mortgages:
1. Loan Repayment: The loan becomes due and payable when the homeowner dies, sells the home, or permanently moves out. This means that the homeowner or their estate must repay the loan balance, including any accumulated interest and fees.
2. Home Sale: If the homeowner decides to sell the property, the proceeds from the sale will be used to repay the reverse mortgage. If the sale price exceeds the loan balance, the homeowner or their heirs will receive the remaining funds. However, if the sale price is insufficient to cover the loan balance, the Federal Housing Administration (FHA) insurance associated with most reverse mortgages will cover the difference.
3. Heir’s Options: Upon the homeowner’s death, their heirs have several options. They can repay the loan and keep the home, sell the home to repay the loan and keep any remaining funds, or allow the lender to sell the property to repay the loan. It is essential to note that heirs are not personally liable for the loan, and the lender cannot seek repayment from any other assets.
4. Non-Recourse Loan: Reverse mortgages are non-recourse loans, meaning that the borrower or their estate will never owe more than the appraised value of the home at the time of repayment. This protects the homeowner and their heirs from being personally responsible for any shortfall if the loan balance exceeds the home’s value.
5. Counseling Requirement: Before obtaining a reverse mortgage, borrowers are required to undergo counseling from a HUD-approved counselor. This counseling session aims to ensure that borrowers understand the loan terms, costs, and potential consequences. It helps borrowers make informed decisions about whether a reverse mortgage is suitable for their financial situation.
Common Questions about Reverse Mortgages:
1. Can I lose my home with a reverse mortgage?
No, as long as you continue to meet the loan obligations, such as paying property taxes and insurance and maintaining the property, you can remain in your home for as long as you wish.
2. Can I leave my home to my heirs with a reverse mortgage?
Yes, you can leave your home to your heirs. However, they will need to repay the loan balance, either by selling the home or using other funds. If the loan balance exceeds the home’s value, the FHA insurance associated with reverse mortgages will cover the difference.
3. Can I use a reverse mortgage to buy a new home?
Yes, a reverse mortgage for purchase allows you to use a reverse mortgage to buy a new home. You will need to meet certain eligibility criteria and use the reverse mortgage proceeds to pay for the new home’s purchase price.
4. How much money can I borrow with a reverse mortgage?
The loan amount is determined by factors such as your age, the appraised value of your home, and current interest rates. Generally, the older you are and the more valuable your home, the higher the loan amount.
5. Do I have to repay a reverse mortgage while I am still living in my home?
No, you do not have to make monthly mortgage payments while you are still living in your home. The loan is repaid when you sell the home, move out permanently, or pass away.
6. Can I lose my home if I outlive the reverse mortgage loan amount?
No, you will not lose your home if you outlive the loan amount. You can continue to live in your home as long as you meet the loan obligations, such as paying property taxes and insurance.
7. Can I use a reverse mortgage to pay off my existing mortgage?
Yes, one common use of a reverse mortgage is to pay off an existing mortgage. This can help eliminate monthly mortgage payments and free up additional cash flow.
8. Can I refinance my reverse mortgage?
Yes, it is possible to refinance a reverse mortgage. However, the refinancing process and eligibility criteria may differ from those of traditional mortgages.
9. Can I use the reverse mortgage proceeds for any purpose?
Yes, you can use the reverse mortgage proceeds for any purpose. Whether it’s paying off debts, covering medical expenses, or enjoying retirement, the choice is yours.
10. What happens if I need to move into a nursing home or assisted living facility?
If you move into a nursing home or assisted living facility temporarily, the reverse mortgage will not become due. However, if the move is permanent, such as more than 12 consecutive months, the loan will become due and payable.
11. Can I sell my home with a reverse mortgage?
Yes, you can sell your home with a reverse mortgage. The proceeds from the sale will be used to repay the loan balance, and any remaining funds will be given to you or your heirs.
12. Can I pay off a reverse mortgage early?
Yes, you can pay off a reverse mortgage early without incurring any prepayment penalties. This can be done by selling the home, refinancing the reverse mortgage, or using other funds to repay the loan.
13. Can I qualify for a reverse mortgage if I have bad credit?
Reverse mortgages do not have strict credit score requirements. The loan eligibility is primarily based on your age, home value, and current interest rates.
14. Are reverse mortgage proceeds taxable?
No, reverse mortgage proceeds are not considered taxable income. They are considered loan advances and are not subject to federal income tax.
Understanding what happens when a reverse mortgage runs out is crucial for homeowners considering this financial option. By knowing the facts and answers to common questions, individuals can make informed decisions about their financial future and the impact on their heirs.
by Investor Times